Student Housing REITs Continue Development Focus

Student Housing REITs are the most active developers in the commercial property sector today. The sector is well into its development cycle, while its conventional counterpart, multifamily, is still ramping up.

The student housing development activity is driven by a number of factors in addition to the obvious supply-demand dynamic within the industry, according to Jamie Wilhelm, executive vice president of public-private transactions for American Campus Communities Inc. (ACC). He says higher education budget constraints, coupled with lengthy procurement and contracting processes, compel state-supported universities and colleges to seek out third-party development partners. Student housing REITs are involved with these schools to develop on-campus and off-campus housing.

ACC has largest development pipeline of all three student housing REITs, which makes sense given the fact that it’s also the largest and oldest REIT in the space. It has $593.4 million in owned development projects currently under construction with deliveries scheduled this fall and in 2013.

The developments are all core class-A assets close to campuses in their respective markets and on track to meet previously announced development yields in the range of 7 to 8 percent. ACC’s 11 new owned development projects scheduled to open this fall, which represent an investment of $385.4 million, are preleased at an average of 76.3 percent for the upcoming academic year as of April 20, 2012. Six of those assets leased above 90 percent.

Among ACC’s most impressive projects scheduled to deliver in 2013 is the development on the Drexel University campus in Philadelphia. The $97.6 million development, which consists of 361,200 sq. ft. of mixed-use student housing and retail space, was structured via American Campus’s American Campus Equity (ACE) program under which the company will develop, own and manage the project through a 70-year ground lease making annual rent payments to Drexel.

Designed by Robert A.M. Stern Architects, the development will include two eight-story buildings that front Chestnut Street while maintaining an open entry corridor to the adjacent Creese Student Center. The broad use of glass at the street level combined with limestone will continue Drexel’s progress toward creating a pedestrian-friendly, mixed-use campus district enlivened by retail amenities.

The building design will also include a 19-story residential tower at the corner of Chestnut and 32nd streets. The two-story street-level space will include retail outlets, neighborhood restaurants, and a new corner entry into the Barnes and Noble—activating student life in an urban setting. Upper floors feature student apartments with both shared and private accommodation options.

In addition to ACC, Education Realty Trust (EdR) and Campus Crest Communities Inc. both are working with universities and developing new projects. Nashville-based EdR, for example, is in discussions with the University of Kentucky to completely revamp the school’s student housing portfolio. The entire industry is buzzing about the implications this one deal might have on other projects.

Last month, EdR On April 17th EdR broke ground on New Central Residence Hall, the first building in a multi-phase project aimed at revitalizing University of Kentucky’s on-campus housing. This first building, which EdR will own under a long-term ground-lease, is designed as a 601-bed, living-learning community with classrooms and meeting space.

This $25.8 million project is being financed through EdR’s On-Campus Equity Plan, which uses the company’s equity and financial stability to fund projects on university-owned land.

Phase II, which has not been formalized, involves EdR assuming management responsibility for the university’s 6,000-bed housing portfolio. Phase II also envisions the systematic demolition and replacement of the majority of the existing on-campus housing as well as its expansion to approximately 9,000 beds over the next five to seven years. In support of Phase II, the Kentucky legislature recently authorized the next $175 million for 2014 and 2015 deliverables in this public-private partnership.

Meanwhile, Charlotte, N.C.-based Campus Crest has six new student housing properties under development, three of which are wholly owned by the REIT and three of which are owned by a joint venture. The six projects have a price tag of nearly $157 million.

The REIT says it has identified more than 200 markets and approximately 80 specific sites within these markets as potential future development opportunities. Its current business plan contemplates the development of approximately five to seven new student housing properties per year.